Goldman Sachs is artificially jacking up the the price of aluminum, thereby receiving soaring profits from its commodities trading. Economists call this kind of activities “the charging of rent", in which an entity generates excess returns by exploiting or creating market distortions. In plain English, it is simply called looting.

The scheme works because Goldman Sachs owns a large chunk of the warehouses that store the commodity and participates in the trade of the futures of aluminum. Goldman Sachs creates major delays and bottlenecks by shipping aluminum from warehouses to warehouses in a merry-go-round fashion, which creates the illusion of aluminum shortage and drives the price up. The price increase will be reflected in the commodity market, where Goldman Sachs is all set up to make the killing move.

In other words, what Goldman Sachs is engaging in is plain old insider trading. Nevertheless, The London Metal Exchange (now a subsidiary of Hong Kong Exchanges and Clearing) rules do allow such practice, making the move “legal" in the eyes of the Exchange’s regulators. In the eyes of consumers, however, Goldman Sachs is worse than highway robbers. Let’s not forget, exchange houses stand to gain with higher prices and trade volume as well. This is a case in point showing that self-regulation simply does not work the way it claims to be.

At this point, we are not sure whether anti-competition regulators will step in to clear the mess. If I have to venture a guess, I would say no. Two other questions also go unanswered: Why am I not surprised that this is not reported in the HK media, at all? How come I fully expected the economics professors of HK would choose not to write anything about the danger of lax regulation and the market fundamentalism?

4 Responses to In Other Parts of the World: White Collar Criminals at their Best

The Exchange, though not a party to the “crime", turns a blind eye to the looting and sits back and waits for its slice of the pie. After all, one way or another, it can claim its share of the looting proceeds. Do academics receive some sort of free lunch or subsidies from the looters as well? Or, alternatively, they accept the phenomenon as a norm in the free market economy?

Well, banks and investment banks alike do hire a lot of economists. There are other perks like conferences, connections, consulting works etc. More pure academics are too caught up in teaching and research that they normally do not catch wind of this. Seeing how HK Exchange owns the LME now, HK regulators, investors etc have become aiders and abettors to the crime, and HK academics do have the duty to speak out, as HK Exchange gets profits from that.

I believe that the likely victims of this looting won’t be the consumers, but the manufacturers. In principle, the manufacturers may transfer the cost the consumers, but the reality will not allow them, as the retailers will pressurize them to maintain the same price. In other words, the manufacturers have to produce the same products with higher cost.

And by the way, law always favor the rich but discriminates against the poor. Theft or robbery can accrue a criminal record and imprisonment, but not for this kind of ‘white collar crimes’

Well, in an economy, your spending is my income. Suppose the manufacturers cannot raise price and they cut down production instead, workers will get laid-off. At the end, it is still the people paying the price.

That’s why I’m so disillusioned about law. White collar crimes in this scale hurts the society more than say 10 robberies combined. It rewards dishonesty, produces vast inequality, and socializes costs and privatizes benefits. Nevertheless, the politicians will not do anything about it, because they need to get money from the banks.